CRU Consulting Steelmaking raw materials – key trends
Prepared for the 82nd Session of the OECD Steel Committee
Prepared by CRU Consulting
Laura Brooks, Principal Consultant
t: +44 (0) 20 7903 2239
23rd March 2017
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Agenda
• Recent trends for the bulks
• Snapshot of base case long-run forecasts
• 4 key trends to watch
• Why are these trends important?
• Conclusion
OECD Steel Committee
3
2014 - 2015: prices crashed due to over-investment in supply
CRU uses super cycles to justify expectations for long-run price trends
1. Super cycles typically take about 25 years peak to peak or trough to trough
2. High capital cost commodities (hard rock or bulks) have a wide amplitude, while less capital- intensive
industries have a narrow amplitude
3. Super cycles come about because of an overreaction of investment following a price spike
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100% Price 2015/2011 % Volume 2015/2011
Price versus volume change
Upstream steel market
OECD Steel Committee
Source: CRU
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Lower costs also helped to drive prices down
CRU Business Cost Curve
x axis: cumulative production, Mt
y axis: Business Cost (normalised to 62% Fe fines, CFR China, $/t
Downwards pressure from lower oil prices, currency depreciation, lower
contractor costs, reduction in headcounts, change in mine plans etc.
Are the cost reductions sustainable?
….this is critical for CRU’s price forecasts
OECD Steel Committee
Source: CRU
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A recovery ensued in 2016, followed by sharp gains in 2017. Why?
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Monthly price, 62% Fe fines, CFR China Average monthly price
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Australian quarterly contract HCC Average quarterly price
Iron ore price
Hard coking coal price
OECD Steel Committee
Source: CRU
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An improved demand side picture stabilisation in global crude steel production…
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1000
1500
2000
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016
ROW
China
Global crude steel production
-8%
-6%
-4%
-2%
0%
2%
4%
6%
Q12014
Q32014
Q12015
Q32015
Q12016
Q32016
Rest of world China
Carbon crude steel production growth, y/y %
-30%
-20%
-10%
0%
10%
20%
China North America Europe
HR coil EBITDA margin for Chinese producers, %
A slight increase in demand and expectations of production cuts in China drove steel prices higher
Steel margins fattened despite the increases in iron ore and coking coal prices
…and higher steel prices and margins
OECD Steel Committee
Source: CRU, WSA
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For iron ore = a Chinese import boom, not a demand boom, drove prices higher
-4 -4 -9
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5
30
55
80
Crude steel Hot metal Iron ore consumption Iron ore imports
Chinese crude steel production and iron ore consumption, 2016, y/y change, Mt
The result of a
sharper cut in
Chinese
domestic iron
ore production
OECD Steel Committee
Source: CRU, WSA
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For coking coal = the Chinese government’s policies played a central role in price movements
China coal capacity, annualised, bn t
NB. Total capacity figures exclude idled capacity.
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4
2
1
0
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16 Q3 16 Q4 16 Q2 15 16 Q1 17 Q1
+13%
Operating new capacity Permanently closed capacity Operating capacity
276 working day policy in China Implementation Relaxation
Global prices Global prices
OECD Steel Committee
Source: CRU
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Agenda
• Recent trends for the bulks
• Snapshot of base case long-run forecasts
• 4 key trends to watch
• Why are these trends important?
• Conclusion
OECD Steel Committee
India will be the largest driver of steel demand growth
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5%
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15%
20%
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30%
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China has not yet hit peak steel but it will no longer drive growth LHS: finished steel consumption, Mt (bars)
RHS: growth in apparent demand, % (line)
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2015 2020 2025 2030 2035North America Europe Asia-Pacific advanced Latin America
Russia & CIS China Asia-Pacific, developing India
Middle East Africa
Global finished steel demand, Mt
OECD Steel Committee
Source: CRU, WSA
Will the key markets for iron ore and met. coal miners change in the long-term?
-4%
-2%
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2%
4%
6%
8%
10%
12%
14%
North America
Europe
Asia-Pacific, advanced
Latin America
CIS
China
Asia-Pacific, developing
India
Middle East
Africa
Hot metal production CAGRs by region/country
2000-2015 2015-2035
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OECD Steel Committee
Source: CRU
Supply/demand “gap” is very different when comparing the bulks
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800
900
1,000
1,100
1,200
1,300
1,400
16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35
Possible Probable Idled Committed Demand
Gap analysis: met. coal market, demand and potential supply, Mt
Met. coal
S/D “gap” to be filled
by new projects
• IRON ORE - no new greenfield investment is
required in iron ore in the long term, i.e. there is
no gap between supply and demand.
• This does not mean that no new projects will
enter the market.
OECD Steel Committee
Source: CRU
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Agenda
• Recent trends for the bulks
• Snapshot of base case long-run forecasts
• 4 key trends to watch: scrap generation and usage in China
• Why are these trends important?
• Conclusion
OECD Steel Committee
China’s construction industry has evolved dramatically over the past 20-30 years
The Shanghai skyline highlights one of many examples of the transition to modern construction methods:
OECD Steel Committee
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The steel used in the 1980s/90s is now returning to the market as scrap
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1,500Fund Generation
Chinese obsolete scrap generation and fund, Mt
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China World ex-China
Scrap rates in EAF production, kg/tls
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China World ex-China
Scrap rates in BOF production, kg/tls
An increase in scrap consumption in both the EAF and BOF steelmaking is forecast
OECD Steel Committee
Source: CRU
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End of boom times for hot metal production and iron ore and met. coal demand
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240
480
720
960
1,200
1,440
1,680
RoW India China
Global hot metal production, Mt
This is a negative for the miners
What does this mean for steel
producers?
China’s hot metal production falls at a faster rate
than crude steel due to increasing scrap use
OECD Steel Committee
Source: CRU, WSA
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Agenda
• Recent trends for the bulks
• Snapshot of base case long-run forecasts
• 4 key trends to watch: influence of Chinese government on supply
• Why are these trends important?
• Conclusion
OECD Steel Committee
18
Chinese domestic production is critical for the market balance (and price) for both bulks
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2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016
Iron ore price Chinese domestic iron ore production
Historical relationship between price and Chinese domestic production
Chin
ese
do
me
stic
iron
ore
pro
du
ctio
n, M
t Iron
ore
price
, $
/t
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China
Indonesia
Iran
Mexico
Other Africa
Russia
South Africa
Ukraine
USA
Iron ore supply exits by country, 2013 -2016
Production idled in Australia and Brazil
(combined) in 2016 was well below China’s
volume of exits
OECD Steel Committee
Source: CRU
(3)
(2)
(1)
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Production m/m change
LHS: Yangquan coal production, Mt
RHS: Yangquan coal production, m/m change, Mt
(3)
(2)
(1)
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10
Production m/m change
LHS: Shanxi Coking Coal Group coal production, Mt
RHS: Shanxi Coking Coal Group coal production, m/m change, Mt
Policies to reduce coal production lately have had a dramatic impact on coking coal prices
There is high uncertainty over future policies. Met. coal is likely to be more impacted than iron ore.
OECD Steel Committee
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Agenda
• Recent trends for the bulks
• Snapshot of base case long-run forecasts
• 4 key trends to watch: steel industry restructuring in China
• Why are these trends important?
• Conclusion
OECD Steel Committee
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Restructuring of the Chinese steel industry means a switch to medium-sized blast furnaces
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1,000Number of blast furnaces in China by size
>4,000 m3 3,000-4,000 m3 2,000-3,000 m3
1,000-2,000 m3 <1,000 m3
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Pellet rate in China, kg/thm
Outdated
Environmentally un-friendly
Inefficient
….steel capacity is being, and will continue to be, closed
• A focus on productivity drives greater demand
for higher quality blast furnace inputs
• This is a positive for producers of high grade
iron ore products
OECD Steel Committee
Source: CRU
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European blast furnace data demonstrates increased pellet rates aiding higher PCI use
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Working Volume
x-axis: pellet rate, kg/thm y-axis: PCI rate, kg/thm Bubble size: working volume, m3
OECD Steel Committee
Source: CRU
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Agenda
• Recent trends for the bulks
• Snapshot of base case long-run forecasts
• 4 key trends to watch: flattening and lower of industry cost curves
• Why are these trends important?
• Conclusion
OECD Steel Committee
Industry cost curves are lower and flatter than pre-2013 levels…
Iron ore Business Costs, $/t, real 2016
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100
120
Brent Crude forecast, $/bbl
…this is despite upwards pressure
from oil and currency
What impact does this have on long-run price expectations?
OECD Steel Committee
Source: CRU
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Agenda
• Recent trends for the bulks
• Snapshot of base case long-run forecasts
• 4 key trends to watch
• Why are these trends important?
• Conclusion
OECD Steel Committee
26
Summary: what do these key trends mean for the bulks markets and for steel?
• Scrap lower demand for raw materials, lower prices
for raw materials, lower input costs for steel
• Chinese domestic mining industry volatility
(scenario analysis!)
• Rationalisation of Chinese steel sector (environmental
trigger) change in demand for different raw
materials product segments
• Lower industry costs and a flatter curve lower
steady-state prices, an end to 70% EBITDA margins
(iron ore), slower supply response, lower input costs
for steel compared to early 2010s levels
OECD Steel Committee
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OECD Steel Committee
Thank you for listening
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If you have any questions, please don’t hesitate to contact us:
Laura Brooks
Principal Consultant, CRU Consulting
t: +44 (0) 20 7903 2239
Matthew Poole
Head of Ferrous, CRU Consulting
t: +44 (0) 20 7903 2179
OECD Steel Committee
